What is dividend reinvestment?

Dividend reinvestment means using the dividends an investment pays to buy more of it, instead of taking them as cash. The additional shares pay dividends of their own, which buy still more shares. Over long periods, this compounding makes reinvested dividends one of the largest sources of a stock investment's total return.

The formula

If an investment's price grows at a rate $g a$ year and it pays a dividend yield $y$ , its value with dividends reinvested grows each year by about:

1 + r_{\text{total}} \approx (1 + g)(1 + y)

so that after $n$ years:

V_n \approx V_0 \, \left[(1 + g)(1 + y)\right]^n

Without reinvestment, the investment grows only with its price, to $V_0 (1 + g)^n$ , and the dividends pile up separately as cash.

A simple illustration

€10,000 is invested in a stock market that rises 5% a year in price and yields 3% in dividends. After 25 years, ignoring taxes and costs:

	Value of the investment	Dividends taken as cash	Total
Dividends reinvested	€70,906	—	€70,906
Dividends taken out	€33,864	about €14,300	about €48,200

Reinvesting produced about €22,700 more from the same investment, because every dividend kept earning returns for the rest of the period.

Ways to reinvest

Accumulating funds reinvest automatically inside the fund, without transaction costs.
Reinvestment plans offered by some brokers buy fractions of shares with each dividend payment.
Manual reinvestment: collecting dividends and investing them from time to time, which gives control over where the money goes — for example into whichever part of the portfolio is under-weight.

Things to keep in mind

Taxes. In most countries dividends are taxed when they are paid, whether they are reinvested or not, so what gets reinvested is the dividend after tax.
Income needs. For investors living on their portfolio, taking dividends as cash is the whole point; reinvestment belongs to the years of building wealth.
Concentration. Reinvesting each company's dividend back into the same company can let the largest payers grow into outsized positions.

A worked example

Worked through on a sample portfolio. The figures below are that portfolio’s, not yours.

How much difference does reinvesting dividends make over time?

I can explain this clearly without numbers.

What reinvesting dividends does

Reinvested dividends buy more shares immediately, so those extra shares also pay dividends later. That creates compounding: dividends generate dividends over time.
Taking dividends as cash stops that compounding unless you put the cash back to work; cash held outside the investment typically compounds slower or not at all.
The gap between reinvesting and taking cash grows with higher dividend yield, longer holding periods, and stronger price growth. Fees, taxes and any interest the cash earns reduce that gap.

How to see the effect for you

I can run a side-by-side calculation using your actual portfolio and show the end values and the difference, with clear assumptions (holding period, whether cash earns interest, taxes, fees).
The simulation will state all assumptions it uses.

If you want, I’m happy to run that comparison for your portfolio now.

See these numbers for your own portfolio

Floreo works out every figure on this page from your own holdings — returns, risk, allocation, currencies — and the assistant explains them the way this page does. Import from your broker, or try it on the sample portfolio first.

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The demo opens straight away on a sample portfolio — no account needed.